As the editor for the health-care, biotech, and pharmaceutical sectors, I see all kinds of stories about health-care companies. The good news and the bad cross my desk. Some companies in my sectors, like Intuitive Surgical (Nasdaq: ISRG), improve outcomes for patients in what, I believe, is a cost-effective manner. Others, like insurers, seem to struggle balancing profits and serving customers.

Some of the best could qualify as a "Firm of Endearment." This was a term coined by marketing scholars Sisodia, Wolfe, and Sheth in a study that found that companies that treated all their stakeholders equitably made great investments. Think Johnson & Johnson (NYSE: JNJ). Over the 10 years of the study, which ended in June 2006, these companies returned 1,026%, absolutely crushing the S&P 500.

And the link that tied them all together was management.

Management whose culture of doing the right thing by their customers, employees, and shareholders led to profit.

The gift of sight
In the 1970s and 80s, researchers at pharmaceutical giant Merck (NYSE: MRK) discovered that a microorganism found at a Japanese golf course could kill some parasites. This came to be the animal medicine ivermectin, sold as Ivomec, and it's used to treat anything from ear mites in cats to heartworms in dogs. Result? Thousands of happy pet owners and lots of money for Merck.

It also worked against a parasitic worm found in horses, which was very similar to what caused river blindness in humans. And it turned out that ivermectin treated this disease, too. But the people who most needed it, in poor regions of Africa, couldn't afford it.

What should Merck do? Leaving them to go blind was wrong. After unsuccessfully seeking distribution partners, Merck's then-CEO Roy Vagelos made the unprecedented decision to give the drug away. Result? Millions of lives improved and bolstered employee pride.

It begins at the top
This is not too surprising. George W. Merck, former chairman and son of the American founder, put it this way:

We try never to forget that medicine is for the people. It is not for the profits. ... The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.

It pays off, too. Japan remembered that Merck had donated a large supply of streptomycin to the country after WWII to fight tuberculosis. In 1983, it allowed Merck to make what was, at the time, the largest foreign direct investment in a Japanese company. Today, Merck remains a large pharma player there. Recalling this, Vagelos said, "Doing the right thing can bring unexpected rewards later on."

Money, money, money
Of course, this contradicts what Milton Friedman taught. The Nobel Prize-winning economist wrote that any diversion of company resources from profitable investment is wrong: "There is one and only one social responsibility of business, [which is] to use its resources and engage in activities designed to increase its profits."

How did that work out for you?
This "profits first" attitude arguably helped drive many companies into trouble last year, such as Citigroup (NYSE: C) and now-defunct Washington Mutual.

And it's likely a large contributor to the health-care crisis. After all, profits suffer at insurers like Aetna (NYSE: AET) or Humana if they pay out "too much" in claims.

Companies that have a management culture of driving benefit to all stakeholders -- customers, employees, shareholders -- also have a history of performing well on the bottom line.

Those With Such a Reputation

10-Year Average Annual Growth, Net Income

10-Year Return




Starbucks (Nasdaq: SBUX)



Whole Foods Market



Those Without Such a Reputation

10-Year Average Annual Growth, Net Income

10-Year Return

General Electric (NYSE: GE)



Home Depot



JPMorgan Chase



Data from Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

Granted, not every company falls neatly into these categories. Merck, for instance, has managed only 0.3% average earnings growth over the past 10 years (but did 14.5% per year for the five years before that). But studies like that from Sisodia, Wolfe, and Sheth, as well as comments by Warren Buffett, confirm the assertion that if you want to profit in the stock market, it can pay to look for companies that have a culture of treating its stakeholders well.

The culture's the thing
Management's culture can be the difference between a company with happy, repeat loyal customers driving profits (and share price) and one that risks everything by narrowly focusing on the bottom line.

At Motley Fool Hidden Gems, an "ethical, pro-shareholder management" is one of four core attributes we look for. "[W]e want to find companies run by managers who are honest and who show above-average skill at increasing the value of our investments. ... No hype, no shady dealings, and no inconsistencies in the company's story."

Merck under Roy Vagelos would qualify.

Seth Jayson and Andy Cross, co-advisors for Hidden Gems, are finding undervalued stocks that meet that core attribute. Their latest find is, in Seth's words, "a heavyweight which has been left for dead by Mr. Market amid worries about the [health care] debate."

To discover the name of that company, and to get exclusive access to a video revealing Seth's valuation, plus the team's nine "Buy First" stocks, sign up for a free 30-day trial by clicking here.

Jim Mueller owns shares of Starbucks and Intuitive Surgical and is a beneficial owner of General Electric shares. Costco, Starbucks, and Whole Foods are Stock Advisor selections. Costco, Home Depot, and Starbucks are Inside Value selections. Intuitive Surgical is a choice at Rule Breakers. The Fool owns shares of Costco and Starbucks. Johnson & Johnson is an Income Investor pick. The Fool's disclosure policy is now afraid of going blind.